Something
Ventured:
October 25th, 2002
By Brent
Holliday
Greenstone
Venture Partners
"Is
something wrong?" she said.
Of course there is.
"You're still alive," she said.
Oh, and do I deserve to be?
Is that the question?
And if so, if so, who answers? Who answers?
- Pearl Jam, Alive
We
are still mired in this muck of a downturn. In the
recent spat of earnings announcements by technology
bellwethers, I did not hear about any upward momentum in
technology spending. Microsoft did their nice quarter
with mirrors (deferred revenue and a change in the way
they do long term software licenses made their quarter
seem great). Most companies stopped the trend down in
profit through cost cutting, not increased revenue.
Sure, the market bounced back nicely, but gravity is
still pulling that line on the chart.
If
this continues for another 12 to 18 months, one has to
think of changes that entrepreneurs and larger company
CEOs will make in order to adjust to the vagaries of
this market. Choice number one is to throw in the towel,
but that is the easy way out. Choice number two is to
cut costs dramatically to ride out the storm. Most, if
not all, companies have done this. The result is a lot
of tech people out of work and a brutal job market for
at least another year.
A
friend and former co-worker sent an e-mail this week as
he contemplated the broader implications of the current
cost-cutting strategies. He is in the software industry
in the Silicon Valley and has worked here in Vancouver
and down there. Here's some of his e-mail that he was
prompted to write after reading an opinion of the same
sentiment in the San Jose Mercury News last week:
Brent,
I am concerned about this trend of moving commodity
software development, like quality assurance, offshore.
As this trend develops what's to stop core engineering
from moving offshore as well? While I am not a
protectionist and believe the free-market should rule, I
have concerns about what this means to our industry -
especially Canada. I see that there are several
companies in BC who are making out quite well doing
contract coding. What does this mean for them? Are they
now in a fight with similar companies in Asia? Does this
mean that the pay scale for these jobs will be
determined by who can do the job cheapest? Is software
engineering now a commodity business? How does the Tech
industry in BC now encourage young people to go into
this field if after the cost of paying for such an
education the return pay scale is based on one that is
set on the cost of living in a country where competent
knowledge workers are literally a dime a dozen?
If you recall history, after the PC boom when
semiconductors became a commodity the same thing
happened. As this initial spike in the Internet settles
down and doing business on the web goes mainstream do we
not foresee the same cycle repeating itself? After all,
what do I care where my companies website was developed?
I just want it built yesterday and for next to nothing.
I'm not looking for answers, just wanted to see what you
think. I mean it wasn't easy to get work after I got
laid off last year and although I am gainfully employed
at the moment, it's not full-time. Things don't look
like they will pick up any time soon. I already know
five people that I worked with in the past who have
given up on the tech sector after having worked in this
area much longer than I have. Two are in real estate,
one is selling insurance, another invested in strip
malls and the final guy (who happened to be a senior
customer support manager) is now selling pants at the
Gap. Once this contract runs out, I'm wondering if my
next job is going to require me to ask, "Would you
like to Supersize that?"
Bimal Parmar McAfee.com
Things
are so grim in the job market in the Silicon Valley that
a former executive that Bim worked with had a domain
registered in his dog's name (for a future web site, I
guess) and received an e-mail looking for the HR
director of the presumed company named Laddu. I read the
e-mail. The guy was very experienced and he was
desperately trying to differentiate himself. Apparently
Laddu wasn't impressed enough to hire him. Didn't pass
the sniff test, I guess.
Getting
back to the core issue brought up by Bim, will there be
a permanent loss of jobs out of North America in
software engineering? The issue with any job sector that
moves to low cost labour is this: Can it be a commodity?
Telesales is clearly a commodity and can be done from
anywhere. Quality testing of software code is becoming a
commodity. Contract coding of custom applications is
moving that direction, especially with the
standardization of web application frameworks and the
predominance of new software tools based on these
frameworks. Any enterprise looking to lower costs of
contract development should consider some of the
advantages of groups that do the grunt work off-shore.
What
about the company that has its core business as software
development? Will core development functions move
off-shore? Much of what is done in software product
development is so iterative in nature that it would be
difficult, if not impossible, to have people halfway
around the world develop source code. Product managers
cannot be 10,000 miles from the developers in critical
development cycles. Also, true innovation in application
ideas or underlying architecture will not come from $3 a
day programmers in Thailand or Bangalore.
The
automobile industry, the consumer electronics industry,
the semiconductor industry, the PC industry and the
wireless phone industry have all shown us that low-cost
manufacturing production eventually flows through the
lowest cost countries in the world. Software, to the
extent that it is "manufacturing", will fall
into the same cycle. Things that are "easy" or
repeatable in software development will move away. Our
current economic condition and cost-cutting will
accelerate it. But will the job losses be huge? I don't
think so. Will the pay scales move down here to match
the low pay elsewhere? That has not been the pattern in
any of the other industries. Mind you, some of them had
huge unions here that pretty much prevented any movement
on pay.
The
San Jose Mercury article writer had a very good point
about how to "save" these job losses overseas.
We have to create new ones. In the absence of the new
new thing (PC boom, client/server computing, Internet
boom) we can't create new jobs, with new talents and
experience required that drives good, North American
type salaries. What is it out there on the horizon that
will allow the sophisticated C++ programmer to re-train
quickly and be part of the innovation that the low-cost
countries can't do? I don't see it yet and neither did
the writer, but the key to job creation clearly lies in
innovation.
Wherever
there is change, there is opportunity and entrepreneurs
look to exploit opportunities. From the "if you
can't beat 'em join 'em" file, I have another
friend who used to be in investment banking (another
industry that has a lot of people looking for Gap jobs)
in Asia, who now runs a contract software development
business himself. He serves Japan, Singapore and other
more developed Asian countries with low-cost programmers
in Thailand and Vietnam. Business is very good. His
typical client needs custom development around a
standard Windows based program (accounting, transaction
processing, supply chain, CRM) that his programmers are
familiar with..
What
else can an entrepreneur do in the face of lower cost
operations? An entire industry was created in the world
of semiconductors when low cost production went to
Taiwan and Singapore: the fabless IC design industry.
Broadcom, PMC-Sierra and other became very large
companies, employing many North Americans, by exploiting
the fact that production of their chips could be done
elsewhere. The enormous jobs lost at these firms are due
to the telecom downturn and not cheap Asian competition.
This is exactly what I mean when I mentioned new
business models that might be created out of necessity
in this downturn. Where is the next fabless IC design
industry?
The
solution for lost jobs and commoditization of some of
the software industry is to find the next big thing that
drives demand, or, as in the fables design model, find a
new way to do business that leverages the
commoditization, spurring a bunch of new companies in
North America. Innovation in the form of disruptive
technology and/or in the form of how to do the business
of technology should be the highest priority of policy
makers here in BC and elsewhere.
When
you bring this problem of lost jobs from the abstract
generalities down to the individual, it seems clear to
me that you must avoid being in the "dime a
dozen" category, as Bim put it. To avoid losing a
job to lower cost countries and never finding work in
the industry again, you have to get the skills and the
experience that separates you from the pack. It's the
old adage about facing a bear in the woods: I don't have
to outrun the bear to survive; I just have to outrun
you.
Letters
from Last Time -
Re: A Very Limited Partner
Brent,
I liked your article even though I didn't completely
agree with the overall tone that it's mostly bad news on
partnerships. I think you are mainly right that too many
small companies don't get the results they hoped for.
Mostly I think this is bad planning and execution - i.e.
lack of an understanding of what a partnership is and
does, lack of a strategic plan, lack of development of a
mutual value proposition to the end customer.
I've also spent over 20 years on the big partner direct
sales side with IBM, EDS, PeopleSoft, i2 Technologies
and JD Edwards. I know many times I won the deals
because of my partners' ability to differentiate my
offering to the end customer. Yes, it helped if I got
some sort of compensation for helping sell their
product, but that was the exception not the rule. In the
end, closing the deal with a partner vs. losing to a
competitor was always the major motivation to work with
them. Smart sales people understood their partner's,
learned how to work with them, and helped build their
business for both parties mutual benefit. Smart
companies encouraged this. Not every big firm I worked
for was partner-smart, but enough were for me to learn
the difference.
Personally, I never saw the "evil partner"
aspects you referred to, but it was quite common to
partner with an outside company to fill a gap in our
product line that was currently in development.
Sometimes Development delivered a better, more tightly
integrated solution, and sometimes it wasn't as good as
the partner's product, in which case I kept selling the
solution that delivered the best value to my prospective
customer. Most good partners were aware that we were
developing something and tried to keep a step ahead of
us - admittedly a stressful option for them. Sometimes
(rarely) we acquired them.
I think one of the major weaknesses I see in a lot of
the junior BC tech companies is in the sales, marketing
and partner operations. I'm not sure how to address it,
because it's even more amorphous than executive
leadership, but I think its one of the keys to making
the local tech sector more successful. It's unfortunate
that so many companies think they need to move sales
operations to the U.S. to succeed. I'd love to hear your
thoughts on that topic.
All the best, and thanks for writing something that
moved me to respond.
Don Hamelin
PricewaterhouseCoopers
Don:
I had a little fun being negative on partnerships. Of
course they work because it is and will always be a
necessary part of business, especially fro a start-up.
You do make a very good point about a weakness in BC. If
my column was the "What to Watch Out For"
reality check for doing partnerships, then people like
yourself and many other fine, experienced technology
marketing consultants in this town should be the guides
for getting it right on the execution part. As for the
sentiment of moving marketing and sales to the U.S.,
that is a good topic. Too long to address here, but
noted for future subject matter. Thanks for writing.
Hello
Brent: Your column on strategic partnerships certainly
struck a cord with me. Although I do not have
"business development" on my card, I have seen
this type of partnership sink a company. In our scenario
it was the one-hand-doesn't-know- what-the-other-is
doing game (a variation on the partner is too big and
slow).
The VP with the authority to sign up for a strategic
partnership did not have buy-in from the various
technology managers within the firm to actually USE the
product (great for Business Development but no adoption
generally throughout the The Big Company). Large
companies are made up of, well, many people. If only one
or a few (albeit senior) people really want the
relationship you're sunk.
Heather Regehr
Heather:
Yours is one of a few stories of bad experiences that
was sent after the column last time. Yours was the only
one that didn't mention names! Your story is a classic
tale of big companies having many hangers-on and not
paying attention. It's critical that the little company
doggedly pursue the bigger partner and keep your
partnership front and center. Add into the current mix
of big company deals (done in the past two years) the
incredible turnover of people due to job cuts and stinky
stock prices. So many partnerships have stalled due to
new people coming in and thinking very differently than
the person you did the deal with.
What Do You Think? Talk
Back To Brent Holliday
Something Ventured is a bi-weekly column designed
to supplement the T-Net British Columbia web site with
some timely, relevant and possibly irreverent insight
into the industry. I hope to share some of the
perspective and trends that I see in my role as a VC.
The column is always followed by feedback (if its
positive or constructive. I'll keep the flames to
myself, thanks).
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